PG&E tax deduction falls under new penalty plan

Tax deduction falls $405 million under latest penalty proposal

If California regulators adopt a proposed $2.25 billion penalty against Pacific Gas and Electric Co. over the deadly 2010 San Bruno pipeline explosion, the company would be able to deduct an estimated $495 million of that amount from its taxes.

The write-off may sound generous. But it's far smaller than the $900 million deduction PG&E could have had, if regulators had stuck with an earlier penalty proposal that critics considered too lax.

And that's just one of the changes in the proposal that alarms PG&E. In several key ways, the revised penalty plan is substantially tougher than the one it replaces.

Both proposals came from the safety division of the California Public Utilities Commission, which has been investigating PG&E's role in the Sept. 9, 2010, blast that killed eight people and destroyed 38 homes.

In May, the division's director, Jack Hagan, recommended penalizing PG&E $2.25 billion. But the penalty would not have included a formal fine, which is payable to the state's general fund. Instead, Hagan wanted all of the money to be devoted to repairing and upgrading PG&E's natural gas pipeline network. And PG&E would have received credit for work the utility had already done or was obligated to do.

As a result, Hagan's proposal would not have required PG&E to spend any additional money, beyond what the company already planned. And the company would have been able to claim a $900 million tax deduction on the work.

That angered San Bruno officials and some of the commission's own lawyers. After the dispute within the commission's staff became public, the safety division withdrew its proposal and issued a new one last week.

New plan

The revised penalty proposal boasts the same overall size as its predecessor - $2.25 billion. But of that amount, $300 million would be a formal fine, paid to the state. PG&E would still receive credit for some of the work it has already done or is committed to doing. But the amount of credit would be $435 million, much lower than before.

And the tax deduction would fall as well. According to an estimate from The Utility Reform Network watchdog group, PG&E would be able to write off roughly $495 million under the revised proposal.

PG&E calls that "a reasonable estimate" but says the deduction wouldn't be automatic. PG&E spokesman Greg Snapper said the Internal Revenue Service could lower the deduction or eliminate it entirely depending on how the service decides to classify the spending - as a penalty or as a cost of doing business.

The changes in the penalty proposal are serious enough that PG&E Thursday asked the commission for permission to submit new evidence in the penalty proceedings, evidence the company hopes will show that the proposed penalty is too big.

PG&E's argument

A consultant hired by the commission estimated last year that the company could absorb a $2.25 billion hit without suffering serious financial harm. But PG&E now argues that if the commission adopts the new penalty, the company will end up spending a total of more than $4 billion of its shareholders' money responding to the San Bruno explosion.

"As much as any party, PG&E would like to bring these proceedings to a conclusion, resolve its liabilities and focus on moving forward with investments that will strengthen its gas delivery system and assure that the tragedy of San Bruno is never repeated," the company stated in a filing delivered to the commission late last week. "Yet our desire for resolution must give way to an insistence on due process and the rule of law in the face of (the safety division's) filing, which veered far from the 'corrections' of its earlier brief it had promised."

The company's critics say PG&E has had plenty of time to submit evidence in the penalty process. Any proposed penalty still needs the approval of the commission's five-member voting panel to take effect.

"They're flailing," said Tom Long, legal director of The Utility Reform Network. "They're doing whatever they can to throw roadblocks in the way of a meaningful and justified penalty."